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March 4, 2013

The U.S. Tax System: How Did We Get Here? Pt. 1, the Early Years

This is the second in a series of articles for the month of March 2013, 20 Days of Tax Planning Advice for 2013, the third year in which AdvisorOne has focused its content during tax season for advisors and their clients.

Income taxes, payroll taxes, property taxes, sales taxes, import taxes, and estate and gift taxes are just a few of the taxes that we, as Americans, are required to pay. Moreover, we are taxed at the federal level, the state level, the county or parish (in my state of Louisiana) level and even at the city level. Finally, we are taxed while we are alive and some unfortunate souls (although they're really fortunate) are taxed from the grave. Yes, taxes are as much a way of life as baseball, hotdogs, apple pie and Chevrolet (I'm dating myself). How did we ever get to the point where our government is leveraging our future to the extent it is today? For perspective, I'd like to journey back to the beginning of our tax system and learn how our forefathers addressed this situation.

In the beginning was man and man had a need for governance. To facilitate this, we established a central governing authority to protect citizens from egregious acts from forces within or outside of our borders. Hence, government is a necessary institution which requires proper funding.

When America was founded, we spent little in the way of public purposes. In 1643, the colonists adopted what would be the forerunner to the income tax and called a "faculty tax." It was assessed on people according to their "faculties" or their "property and ability to earn income." During the American Revolution (1775-1783) most of the 13 states levied this tax.

Americans have always possessed an independent spirit. Following “oppressive” taxation imposed by England such as the 1765 Stamp Act (imposed specifically on “the British colonies and plantations in America” because of the massive debt incurred by England following the Seven Years war) American colonists began to cry “No taxation without representation.” Their collective emotions reached a boiling point in 1773 with the Boston Tea Party, which eventually led to the revolution.

After independence, another instance of taxpayer revolt began in 1791. At that time, whiskey cost less than 50 cents per gallon and because our government needed to pay down the national debt, levied a 30 cent per gallon tax, the Whiskey Rebellion resulted (which ended in 1794 when George Washington himself led an army into western Pennsylvania and the armed resisters melted away). These are just two examples of Americans rising up in protest of aggressive taxation.

The first national tax system did not emerge until well after the American Revolution. In fact, the Constitution of 1789 gave taxation powers to the federal government to "pay debts and provide for the common welfare of the United States." Obviously, the federal government's role is greatly expanded from its earlier days.

In my next post, we'll look at the period from 1800 to the early twentieth century up to the advent of the modern tax system in 1913. History provides great perspective on the ebb and flow of the tax system. Moreover, if we fail to heed the lessons of history, we may well be destined to repeat its follies.

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